Are rehabs/flips really worth the time?
Here’s my situation: I bought a house that needed a complete repair (new drywall, windows, you name it) four months ago. I hired most of the work done except for the little time consuming jobs that I knew how to do (painting). It still consumed about 10 weeks (60 hours per week) of my personal life to get the job done.
I have been looking at the numbers and it seems dismal. I have a gross profit just above $24K, but minus the $10k in taxes and I’ll only have $14,000 net profit. Please understand I believe this is good, but not great (I have about $10,000 of my personal money into and another $10,000 in credit). Should I be looking at this a different way? Is there a way to dump the $24k into another rehab without being taxed?
Thanks for your interest.
Not all rehabs are worth the time. I have a minimum profit margin criteria of 50k. If it doesn’t net 50k, I don’t do it. Also, I want to net atleast 20% of the ARV to make the profit proportional to the project. With your project you made $23/hr. Spend less time on your projects by hiring out ALLLLLLL the labor. To do the menial work you can hire day laborers or neighborhood kids. Even if you spend an extra 2k for a professional paint crew, it will take them 2 days to paint the entire house, you wont have so many carrying costs, ill make much more money per hour of work (management), and will have time to work on the next deal.
Shoot for better deals. Slim margins don’t leave you room for error and in your case, unsatisfied with the profit. There is nothing wrong with trying to make a killing on a deal or 2. Most deals are not priced for an investor to make a killing so look harder.
All short term rehabs are taxed at the ordinary income tax, no way around it. If you put a renter in the place for a while the sale profit turns into a capital gain.
Danny,
If I understand you correctly, this wasn’t to far off from the normal begining investor (I have only been doing this since May 06). It’s not quite what the guru’s promise in their unrealistic world, but it’s the normal return.
But what I should be doing is continuing with what I have been doing but hiring out all of the work, and also, look for greater return possiblities in properties.
I belive the latter is going to be the hardest part of all. Do you have any good reads or suggestions in finding great returns?
50k is my rock bottom number. If the property will net $49,999.99, I don’t buy it. I might tie it up and assign it still but that’s not the point. Set a minimum profit margin and stick to it. Take into account your companies overhead, the frequency of finding such deals in your target areas, amount of time/work needed, your satisfication, etc. Don’t expect to be the next billionaire by doing a few residential rehabs. You have to do a lot of them to make REAL money. More expensive residential rehabs are best found in probate, divorces, bankruptcies, and RE agents.
If you move up to commercial rehabs, walking away with a 7 figure check is common. They are much harder to do and have many more places where you can go wrong, but they are worth it in my opinion.
Rehabbing less than a year and making a profit… that’s more than you can say for most. Big money in residential rehabs comes with smart systems because frequency is necessary. Make an assembly line for rehabs!
Wow, that was exactly what I need to hear! I will continue to learn with the little items and then try to magnify them with larger properties.
You mentioned you assign properties. Is that really as fruitful as some experts explain. Any good material to read up on.
I wholesale the properties that just missed my cut off and the mistakes (missed something in the first inspection, underestimated repairs the first time around, bad CMA, etc.). My assignment fees typically range 5-10k. Some wholesalers want more but I’m not out to suck everyones pockets dry. I wouldn’t make a business out of wholesaling because it takes a lot of 5k fees to pay for a Ferrari, Rolls Royce or Aston Martin. It does however yield a lot of money for the time invested.
You probably don’t need to read a book on wholesaling before you get started. It’s very simple. Network with a lot of other investors, tell them what kind of properties your going after, ask them the same. When you come across something that matches another investors criteria, negotiate the price to meet their criteria and get it under contract. Then you sign an “Assignment of Contract” agreement with them and bow out gracefully with a check. Very simple.
It seems so simple. Thanks for your help.
Brian